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Image source: Merck & Co.

Last year is one that Merck's (NYSE:MRK) shareholders would just as soon forget, with shares of the pharmaceutical behemoth dropping 7%. Things haven't exactly gotten off on the right foot in 2016 either, with domestic and global concerns weighing further on Merck's stock.

Then again, Merck remains healthfully profitable and has tools at its disposal to move the needle. This begs the question: Could 2016 actually prove to be Merck's best year yet? My personal belief is that we'll finally see an end to the four-year revenue slide, but we're still a couple years away from Merck having the opportunity to deliver its best year ever.

Merck's issues in a nutshell
What's been holding Merck back, much like other Big Pharma stocks, is concern over patent issues. Merck lost its exclusivity to allergy and asthma blockbuster Singulair earlier this decade, and it's also faced sales weakness in a number of key brands, including Vytorin, Pegintron for hepatitis, Fosamax, and Temodar. In a nutshell, Merck just hasn't been able to bring new drugs to market and ramp them up at a quick enough pace to counteract the introduction of generics. The result is that Merck's top-line has drifted lower from $48 billion in 2011 to an expected $39.6 billion in 2015 (Merck is slated to report Q4 results in the first week of February). 

To be fair, not all of this revenue weakness is Merck's fault. A rising dollar in overseas market has reduced sales and profits for Merck. Since Merck reports in U.S. dollars, it's required to translate foreign currencies back into dollars, often losing money in the process. If we remove these currency effects, as well as divestments and acquisitions, Merck has actually been growing on an operating basis at a very small rate for each of the past three quarters.

Januvia

Image source: Merck & Co.

Of course, the big issue remains what Merck will do with its top-selling type 2 diabetes drug Januvia. Merck has been spending heavily on marketing DPP-4 inhibitor Januvia, and thus far it's been working. Sales of the drug were up 10% in the third quarter from the prior-year period, and 17% on an operational basis. But the emergence of SGLT-2 inhibitors creates a challenge.

It's possible Merck has little to worry about, and SGLT-2s and DPP-4s will work hand-in-hand to improve glycemic balance. Then again, SGLT-2 inhibitors have been shown to induce weight loss (Januvia is weight-neutral) and lower systolic blood pressure, and one SGLT-2 therapy, Jardiance, led to a statistically significant reduction in risk of death. Januvia may be at an inflection point, and investors are obviously concerned about that possibility.

How Merck plans to turn itself around
Merck's plan to boost sales and eventually deliver its best year yet to investors has three components: grow Keytruda, expand into hepatitis C, and bolt-on intriguing and complimentary therapies.

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Image source: Merck & Co.

First and foremost, Merck's future is intricately tied to the success of Keytruda, the company's cancer immunotherapy agent that's designed to supercharge a patient's immune system to more effectively locate and kill cancer cells. Keytruda and Bristol-Myers Squibb's (NYSE:BMY) Opdivo are pretty much it when it comes to high-profile cancer immunotherapies currently approved by the Food and Drug Administration -- although that'll likely change in the coming years.

Both Keytruda and Opdivo are approved to treat metastatic melanoma, with Keytruda claiming substantial share in this indication, whereas in second-line metastatic non-small cell lung cancer (NSCLC) Opdivo looks to have the advantage. Keytruda's indication here is only for NSCLC patients with high PD-L1 expression, whereas Opdivo's approval covered all second-line metastatic NSCLC patients. Both drugs should still prove wildly successful based on early clinical response results and sales data, but it's the ongoing two-dozen plus trials for Keytruda and Opdivo, primarily as combination therapies, that could bear the real value.

Secondly, Merck is hoping to cash in big time with its hepatitis C duo of elbasvir and grazoprevir. Clinical studies of Merck's once-daily HCV therapy have been comparable to Gilead Sciences' (NASDAQ:GILD) Harvoni in that it's delivered 90%+ sustained virologic responses. What remains to be seen is (assuming approval) what Merck prices its combo at, and whether that price can draw physicians and consumers away from Gilead's Harvoni, the dominant HCV therapy.

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Image source: Gilead Sciences.

Along those same lines, Merck is also working on a triplet formulation that could yield phase 2b data in 2016. This new triplet has demonstrated incredibly high efficacy in clinical studies, but more importantly may be able to offer 90%+ effective cure rates for genotypes 1 through 3 in just eight weeks. Perhaps the only way to really supplant Gilead is to shorten the treatment timeframe (which is often 12 weeks); and Merck may have a shot at that by as early as 2017. 

Finally, Merck may be able to reinvigorate growth through what it refers to as bolt-on acquisitions. Merck's management has stated a desire to generally avoid larger deals, and would instead prefer to grab small- and mid-sized companies that complement its existing therapies or diversify its product portfolio.

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Image source: Flickr user Nguyen Hung Vu.

For example, adding Cubist Pharmaceuticals helped bolster Merck's therapeutic focus within acute hospital care products. The transaction is expected to be add to Merck's 2016 profits. By comparison, its acquisition of Idenix Pharmaceuticals gives Merck combination and development opportunities within hepatitis C, but it doesn't have a timetable on when Idenix could generate Merck revenue or profits. Expect more of these bolt-on transactions in the coming years.

Slow but steady
Because of Merck's ongoing losses of exclusivity, and the expectation of increased competition for Januvia, it's likely going to be a slow trudge higher for Merck. However, as we approach 2018 and beyond, it's quite possible Keytruda, its HCV triplet, and other new products could send Merck's sales and profit results to new heights.

Merck remains an intriguing stock to monitor for investors who favor a strong dividend yield and healthy cash flow; but it's still a stock that I'd suggest only be considered with money that you don't need for at least the next five years.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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